Japan Economy to Contract as China Dispute Bites: JPMorgan

A territorial dispute with China, which has disrupted Japanese firms operating on the mainland and hurt exports, is expected to deal a significant blow to Japan’s economy, which is already losing its momentum and could contract in the fourth quarter, JPMorgan said.

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Crowds crossing the famous Shibuya Crossing intersection at the centre of Shibuya's fashionable shopping and entertainment district, Shibuya, Tokyo, Japan.

Japan’s gross domestic product (GDP) is set to contract 0.8 percent in the October-December period, according to investment bank JPMorgan, which had previously expected flat growth in the fourth quarter, hurt by a slump in exports to China and mainland tourists visiting Japan.

Asia’s second-biggest economy expanded 0.2 percent in the third quarter and 1.2 percent in the first quarter, notching up a respectable rate of growth against a generally weak backdrop for the world economy.

“The economic impact on fourth quarter will not be negligible, the sales of Japanese consumer goods, such as autos, reportedly have already plunged. Some Japanese affiliates’ shops and plants in China were damaged severely by demonstrators,” Masaaki Kanno, chief economist at JPMorgan Securities Japan wrote in a note released over the weekend.

“We expect that Japan’s exports of consumer goods to China will fall substantially in the fourth quarter,” he added.

If the territorial dispute lingers through 2013, with no improvement in trade and tourism, Japan’s GDP growth rate will fall to 0.4 percent next year, from previous estimates of 0.6 percent, Kanno said.

China is Japan’s number one export market. It accounted for almost 21 percent of Japanese exports in 2011, up from just 10 percent in 2000.

Cars, for example, which make up 4.5 percent of overall Japanese exports to China, are estimated to fall by 70 percent to 39 billion yen ($496 million) in the last three months of the year, forecasts Kanno. While, auto parts exports are expected to fall by 40 percent.

Automakers including Mazda and Mitsubishi have already reported a sizable decline in China sales for September, down around 20-30 percent from the previous month, as mainland consumers shunned Japanese models.

“Anti-Japanese protests in China are really having significant transmission effects on Japanese businesses, they’re cutting down their production due to lost sales,” said Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight.

Separately, Toyota Motor, Nissan, and Honda Motor announced plans to halve their production levels in China on Monday, due to weaker sales in the mainland market. (Read More: Toyota China Sales Tank as Islands Row Hits Japan Inc.)

Biswas said a bigger concern is the long-term implications for the supply chain of Japanese companies operating in China, with any disruption likely to have negative consequences for both China and Japan.

“A lot of Japanese investment, $80 billion, has gone into China in the last 15 years — a lot of that for the supply chain of big multinationals. If they start deciding to move away from China that will hurt Chinese jobs, as well,” he added.

Tourism to Take a Hit

In addition, the tourism sector is also set to be severely hit as Chinese travelers cancel their trips to Japan, said Kanno of JPMorgan.

Some 40,000 seat reservations were cancelled on All Nippon Airways flights between Japan and China over the September to November period, according to Reuters.

“A large part of the increased tourism into Japan in recent years has been China because of diminished visa restrictions. If that goes down it will be a double whammy for Japan at a time when they don’t really need that,” said Parag Khanna, director at the Hybrid Reality Institute, a research and advisory group.

JPMorgan estimates Chinese tourists receipts will fall to 29 billion yen in the fourth quarter — a 70 percent decline from previous estimates of 95 billion yen. This accounts for almost 40 percent of the expected declines in overall exports in the three-month period.